Establishing if a semiconductor company is in expansion mode or not can be difficult as some companies own their own manufacturing facilities and others use outsourced manufacturing. The first thing to understand is how dependent a semiconductor company is of its own factories. Memory companies typically have Property, Plant and Equipment (PPE) value of close to 100% of yearly revenue, where Intel has PPE/Revenue ratio of around 60%. In the opposite end of the spectrum, you have fabless companies that fully outsource their manufacturing. They have very low PPE/Revenue ratios of 7-15%. In the middle, from 15% to 60% are the fab light models.
With a PPE/Revenue of 33%, ST is in the heavy end of the fab light model. This means that their capital investments will reveal their strategic mode: Consolidation – Balance – Expansion.
Replacement Fixed Capital Investment (RFCI) is the investment level a company need to have to maintain the condition of the current revenue producing assets. The value of Fixed Capital Investments above RFCI contributes to an expansion of capacity and is called Incremental Fixed Capital Investments (IFCI).
IFCI is interesting to monitor as it directly tells you the strategic mode of the company. A negative IFCI implies consolidation and positive IFCI equals expansion. An IFCI of zero means the capital investments a just sufficient to maintain current level of activity and means the strategic mode is balanced.
Plotting the RFCI and the IFCI for ST shows that three quarters ago, ST changed their strategic mode from consolidation to expansion.
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